Discretionary trust

A discretionary trust is a trust in which the trustees decide which of a defined class of potential beneficiaries receives anything, how much and when. No beneficiary has a fixed entitlement — they have only a hope of benefiting, which lawyers call a mere expectancy.

Why they are used#

Flexibility. Circumstances change between the date of a will and the date of death, sometimes by decades. A discretionary trust lets trustees respond to the situation as it actually is.

Vulnerable beneficiaries. A beneficiary with an addiction, a disability, or a means-tested benefit entitlement can be supported without receiving capital outright — because they have no fixed entitlement, there is generally nothing to be assessed against or lost to a creditor.

Blended families. Where someone wants to provide for a second spouse and for children from a first marriage, discretion can hold a balance that a fixed split cannot.

Divorce and bankruptcy. Assets held on discretionary trust are generally harder to reach than assets a beneficiary owns outright.

The trade-offs#

Discretionary trusts sit in the relevant property regime for inheritance tax, which means periodic (ten-yearly) charges and exit charges. They require trustees who will actually act. They need a letter of wishes to guide that discretion, and they carry ongoing administration.

For a modest estate, a discretionary trust is frequently more machinery than the situation warrants. That judgement is the practitioner's, not the software's.

Related#

Life interest trust · Property protection trust · Letter of wishes · Trust drafting software